The Bling Bubble: Cash buyers outbidding rivals

For a while, home buyers had it good: Nose-diving prices, tax credits for repeat and first-time buyers extended into 2010, incentives from builders and concessions from sellers. But with many markets bottoming out around the U.S., property virgins and pros alike are bumping up against a growing wave of formidable rivals: All-cash buyers.

These bidders are often local investors shopping for starter homes they can rent out or remodel, or just trying to make an easy buck off of a beaten-up foreclosure.

All-cash deals represented about 20 percent of all residential real estate transactions during fourth quarter of 2009, NAR spokesman Walter Molony told HousingWatch. During 2009, all-cash deals represented about 9 percent of the residential market, he notes, versus prior years when they accounted for only 7 percent of the marketplace.

"This indicates a lot of investor activity," Molony says. "Anecdotally, we're hearing about first time buyers losing out to all-cash buyers."

NAR doesn't break out individual markets where all-cash deals prevail, but Molony says the association is hearing that cash talks in distressed markets, such as communities in California, Arizona, Nevada, and Florida. But healthier markets also reflect the trend. NAR's Molony says that in Washington DC cash bidding is big, as evidenced by The Washington Post's recent report about the plight of first-time buyers competing against cash buyers.

Surprisingly, not all cash carriers are investors. Some are would-be primary owners so eager to buy that they'll liquidate their life savings in the hope that their Benjamins will outshine rivals' relatively wimpy pre-approval promises from lenders.

Last month The Real Deal reported that in New York City as many as 40 percent of recent sales may have been all cash. But The Real Deal also told the story of a schoolteacher who took cash from a prior home sale and liquidated her entire savings in the hopes that the $725,000 all-cash offer she made on an Upper East Side co-op would beat out her competitors. (It did.)

Don't have hundreds of thousands of dollars lying around? Don't worry: Not all sellers pounce on cash offers first. Fannie Mae recently agreed to give first dibs on newly listed foreclosed homes to owner-occupants, rather than investors -- for the first 15 days the homes are listed, at least. And some multi-family buildings and communities have set limits on the percentage of units that can be acquired by investors, whether cash-carrying or not.